WEDNESDAY, DECEMBER 4, 2013

Yves here. In an interview with Edward Geelhoed, Varoufakis gives an urgent, sobering picture of the conditions in Greece, which contrasts dramatically with the claims made by Eurozone politicians.

By Yanis Varoufakis, professor of economics at the University of Athens. Originally posted at his blog

Some positive sounds are audible from Greece these days. Mostly produced by the government itself, of course, but also by Merkel, by the OECD (along with some negative sounds), by some European officials (while others say they’re ‘impatient’ with Greece). Is Greece slowly recovering?

It takes a passionate disregard for the truth to suggest that Greece is recovering. Investment has fallen by 18% since the dismal levels of 2011/12, credit to non-financial institutions is 20% down from the asphyxiating depths of 2012, poverty has reached record heights, and is still growing, employment is at levels that are best narrated in the style of Steinbeck’s Grapes of Wrath, public debt is exceeding the worst expectations of the greatest pessimists, private debt is reaching for the sky at a time when the collateral posted (e.g. house prices) are sinking fast, the government’s tax take is trailing the worst forecasts. The list of woes is endless and the so-called ‘Greek Success Story’, or ‘Greek-covery’, reflects nothing except the determination to reverse the truth, Goebbels-like, by those who insisted on the policies which resulted in this debacle.

The positive sounds refer to the budget surplus, to a small growth (says the gov’t) or just a small recession (says the others) of the economy.

Europeans have a duty to themselves to see through this toxic propaganda. There is no such thing as a Greek budget surplus – not even a primary surplus (i.e. a surplus if we not count loan and interest repayments). If you look at the government’s own accounts, the January to October 2013 balance reveals a primary budget deficit of nearly €6 billion. As for the rumoured primary ‘surplus’ that is ‘around the corner’ this is a projection, a piece of wishful thinking that may, or may not eventuate, next year. As for growth, the Greek economy is still, by the government’s own accounts, shrinking at -4%. The projection of growth of… 0.4% is for 2014. Europeans need to look at this projection in the context of similar projections which, for example, had (at the time of ‘bailout Mk1’) Greece growing by 2012 at a dizzying rate of 2.3%! In truth, 2014 and 2015 will again see the Greek social economy shrink further.

Is some ‘positivity’ justified, or is Samaras’s so-called success story about ‘justifying austerity in the eurozone’, as The Guardian puts it?

Austerity is being, falsely, justified by the so-called Irish ‘escape’ from the clutches of the ESM. I have argued elsewhere that the justification for austerity in the Irish experience is fraudulent. Nevertheless, the Greece case is not even used by Brussels, Frankfurt or Berlin as a justification for austerity. The reason is simple: it takes only a perusal of the facts to recognise that Greece is in a sad, never-ending mess.

In an op-ed in the Financial Times, Mr. Spiegel recently stated that ‘Athens is gradually shedding the incentives for reforms’. Is that what we’re seeing with the Troika talks, now the gov’t is satisfied with the budget surplus?

What your readers must come to understand is that, the moment the ‘bailouts’ were forced upon Greece in 2010 and then again in 2012, all chance of meaningful, effective reform disappeared. Think about it for a moment: In 2010 the Greek private and public sectors became insolvent. So, what did Europe and the Greek government do? They piled on the weak shoulders of the bankrupt Greek social economy the largest loan in human history on condition that Greece’s GDP (from which old and new loans would have to be repaid) shrinks substantially (for this is what the stringent austerity meant)! Naturally, no one with any sense invested in this country and the insolvency both of the state and of the private sector deepened. Now, turning to reforms, ask any CEO of any decent company: “If you want to reform, to modernise, to re-structure your company, can you do it on the cheap? Without any investment?” The answer is negative. Similarly with Greece. The country was pushed into a never-ending negative spiral that rendered it un-reformable and un-governable all at once. For it is not ‘reform’ to cut wages, pensions and to push taxes through the roof at a time when GDP is collapsing and the banks have no capacity whatsoever to lend even to potentially successful enterprises. These so-called ‘reforms’ are nothing but acts of brutality. The homage propaganda pays to irrationality.

Is PASOK’s concern for overburdening society genuine and sincere, or does it fear for its weakened position only, for political reasons?

PASOK effectively ceased to exist in November 2011, with George Papandreou’s resignation. The party paid the price of being in government, though not in power, at the moment the nation hit the rocks. Papandreou had a golden opportunity in early 2010 to tell the truth (i.e. that Greece was bankrupt) and thus save his government, his party and what was left of the nation’s dignity. He failed spectacularly. After his resignation PASOK became a rump whose raison d’ etre is to provide a life raft for political wreckages like Venizelos. Sadly, a significant party of the Centre Left has now degenerated into a small gang of corrupt politicians struggling to stay out of prison.

Stournaras (Greece’s finance minister) and Samaras (Greece’s PM) say they don’t need a third loan. Is Greece ready to return to the markets, can it stand on its feet? Or do they try to gain confidence with psychological statements like these?

None of the deficit Eurozone member-states can refinance their debts autonomously. Not even Italy and Spain. Without Mr Mario Draghi’s OMT proclamation, in September 2012, which was a clear threat to bond dealers not to bet against the deficit nations’ government bonds, Italy and Spain would have joined Greece, Ireland and Portugal in the group of failed states. While the OMT threat is still managing to keep spreads down, some of the deficit countries can refinance their public debt. Even Greece might be able to do so if the ECB were to signal to markets that Athens would be placed under the OMT umbrella. But to say that they can stand on their own feet in the money markets is to mis-read totally the situation. In this sense, Stournaras and Samaras are not hoping to fool the markets – they cannot be that foolish. No, they are hoping against hope that Berlin will consent to Greece being let out of the ESM and placed under the OMT umbrella. Of course, none of this matters. Whether under the ESM or the OMT, the deficit Eurozone countries (Ireland just as Greece, Spain just as Portugal) are still in chains, caught up in a negative feedback dynamic between un-payable debts, insolvent banks, recessionary forces and mindless universal austerity.

Merkel speaks of ‘impressive facts’, but these numbers are there due to heavy burdening the society. Increased competitiveness, an erased budget deficit, but it caused enormous despair. Samaras calls it ‘the sacrifices of the people’. Is it worth it? Isn’t there a huge difference in realities on paper and in the outside world, on the streets? Didn’t it not only cause despair, but also ruined the economy in the long run?

You are making a significant error: The situation is not just awful on the ground. The situation is unbearable also on paper; in terms of official statistics. Our leaders are disgracing themselves with ‘happy go lucky’ pronouncements that clash with their own statisticians’ numbers. Never before has such energy be expended by political leaders to mislead Parliaments and electorates regarding the economic situation on paper and on the ground. Worse still, our leaders are doing this cynically and knowingly, the result being the greatest democratic deficit in Europe’s post-war history.

Martin Schulz said that the Troika has done ‘more bad than good’. Do you expect a different policy to be executed?

No. I just expect that Mr Schultz is expecting to gather a few more Peripheral votes in his sad quest for the top position in Brussels.

Should bond investors share the costs of bailouts with taxpayers, as the IMF suggests? Should European governments write down the Greek loans? A former IMF economist said recently: ‘There’s no trade-off between austerity and debt restructuring – you have to do both.’

You are asking someone who warned, in January 2010, that any bailout for Greece would be a terrible blow against the Eurozone if it were not preceded by massive debt restructuring. The IMF, behind the scene, agreed with me. But in public they lent their voices to the Berlin-Frankfurt-Brussels cacophonous choir that proclaimed a debt haircut as both unnecessary and undesirable. To have these same officials lecture us on the importance of debt restructuring is a little like listening to the Titanic’s captain lecture us on iceberg avoidance.

What is the path to growth? Or is growth overrated?

It depends on what is growing. At the moment we have growing debts, non-performing loans, poverty, suicides, and… Nazi parties. These are our ‘growth’ areas. What we need, before we can talk about growth credibly, is stabilisation. To stabilise the Eurozone we need to Europeanise, without any federal moves, four realms: public debt management, banking sectors, aggregate investment policies and attempts to quell the humanitarian crisis.

George Pagoulatos says that structural reforms are clearly happening, for example; at the pension system, all possible structural changes have been made, he says, not so much horizontal measures. Others disagree. The Troika agreed not to execute horizontal measures anymore. Are true reforms happing, in your eyes? Where is it needed most?

To compress pensions to unlivable levels is not to carry out structural reforms. As I already argued (see above), genuine reforms cost money and cannot be effected in an environment of fear, collapse and political illegitimacy.

Is there a real, radical alternative to all of this? Are proposals by Syriza possibilities? (If so, which ones mostly?) You seem to have sympathy for the party’s ideas, isn’t it?

No solution can be effected at the national level. It is as if in the 1930s the state of Kansas could have reversed, on its own, the effects of the Great Depression through Kansas-centred policies. The Eurozone is experiencing a systemic crisis that needs to be dealt with systematically. How? What we need is to escape the false dilemma between the current, dead end, policies and the (false) alternative of moving in a federal direction (that Europe is not ready for). This false dilemma must be escaped through a rational redeployment of existing institutions in a manner that does not ask of the surplus nations (like Germany and the Netherlands) to pay the bills of the deficit nations while, at the same time, not pushing the burdens of adjustment onto the weakened shoulders of the deficit countries. Together with my colleagues J.K. Galbraith and S. Holland, we have presented what we call a Modest Proposal for Resolving the Euro Crisis. Michel Rocard, the former French PM, as well as a number of former EU heads of state, have endorsed its basic tenets.

As for Syriza, my reasons for supporting Alexis Tsipras, both in his bid to win government in Athens and also in the context of European politics, is simple: Europe needs a major jolt from a government that is at once committed to the European-Eurozonal project and to the truth. I do not really care where it comes from as long as someone in the EU Council, in the Eurogroup, in Ecofin breaks the code of silence about basic truths that no one dares speak. At long last, Europe must have a debate on basic prerequisites for stabilising the Eurozone. To do so, someone must refuse to continue the lie of the past five years that, supposedly, Europe is on the right track. Tsipras is prepared to veto this lie while doing his utmost to keep Greece in the Eurozone. For this reason he has my support.

How can (youth) unemployment be conquered best?

It is absurd and, indeed, indecent, to imagine that youth unemployment can be tackled when adult unemployment is skyrocketing. Youth unemployment will fall when unemployment falls. Of course, there are clever and innovative methods of combining education with vocation training, as it is done with some success in Germany. But none of this is possible in a crashing economy.

Can you call Greece still a welfare state? To what sort of society will these policies lead to, eventually?

Greece is being used as if it were an experimental laboratory in which the welfare state is dismantled and the experimenters keenly observe the effects of its dismantling. If so, it is time to end this misanthropic experiment. For we can now see that the result is untold pain, economic collapse (even of potentially profitable enterprises), and the rise and rise of a Nazi party in the one country of the European Union that fought most heroically against the original Nazis.

LONDON — Germany has become accustomed to being top of the class in Europe, the economic musterkind, or model pupil, of the Continent. But it was recently reprimanded by the United States Treasury for running a large trade surplus and imposing a “deflationary bias” on the euro zone. Germany was then told by the European Commission that the country could face action under the European Union’s “excessive imbalance procedure,” which gives the commission the right to demand action to address large trade surpluses and deficits.

Riiight.

Germany has a "duty" to deficit spend -- or to spend down surpluses at all?

Why?

Let me see if I can put this into a bit of context when you boil down what is being suggested:

Your people are too smart and industrious -- and thus you have to blow the benefits of productivity improvement that are in fact earned by your workers (and which belong to them -- or at least should!) Hint: "deflationary bias" is called the economic norm absent intervention because productivity improvement over time tends to make the average price level decrease as we learn to do more by using less. This is good, not bad.

The Euro has "risen in value" and this must be counteracted in some way. In a fiat world all currency values are relative. Has the Euro risen in value or has competitive devaluation depressed the value of other currencies instead? There aren't two other major central banks -- the largest two incidentally -- that are intentionally emitting unbacked credit are there? Oh wait -- there are -- the Japanese and American central banks. Hmmmmm...

Weak domestic demand is bad. Really? That depends on why it's weak. If it's because people are tired of playing on the hamster wheel and don't need to buy as much because they're producing more with less, and their goods last longer, that's positive! In addition the savings that this allows for turns into capital formation which in turn fuels innovation. That's a virtuous cycle in that it lifts everyone's standard of living -- well, everyone who participates in it anyway.

Deflation makes debts unmanageable. So what? Debt is a consensual transaction. Stop consenting and stop borrowing. If you can't pay, default and throw the loss on the people who foolishly lent you money. That's how it's supposed to be and if you do that then risk will be priced intofuture borrowing (which should have happened before, but gee, it didn't!)

I don't see the problem here. As for Germany they should erect the middle finger toward the rest of the Euro zone -- and if the EU doesn't like it, I hear stories about there being Deutsche Marks stored somewhere and ready for use.

Perhaps flashing a few of those around Brussels will shake up a few idiots.

The privatisations of SGOs were requested by the troika of lenders (European Central Bank, European Commission and the International Monetary Fund). Finance Minister Harris Georgiades said a week ago that the government will proceed with the privatisation plan, unless the unions can find another way of saving 1.4 billion euros. The minister jokingly added that the government would have to win the lottery for that to happen.

CyTA’s one hour strike today will last from 1:15 pm until 2:15 pm. In a statement released to the press, CyTA unions say that their reason for going on strike is that the government is implementing “a privatisation plan without first briefing the employees”. CyTA unions made clear that no services will be affected by the strike.

CPA employees will strike today, from 9:00 to 11:00

Cyprus port authority unions are demanding that the SGO be excluded from the privatisation proposal. “The goal of the workers is to avert privatisations and to preserve the national wealth and the public interest,” a statement released to the press said. “If we move towards that direction we will give to private interests state revenue and millions in CPA investments.”

The Cyprus electricity authority (EAC) unions met on Friday and decided that they will proceed with a two hour warning strike on Wednesday. The EAC unions’ rhetoric mirrors that of their colleagues in the other two SGO.

In a letter sent to EAC manager Stelios Stylianou, the four unions (EPOPAI, SIDIKEK, SEPAIK and SIVAIK) say that they made every effort to convince finance minister Harris Georgiades on the “negative impact a possible privatisation of EAC will have on the economy, the citizens and society in general” but didn’t get any results.

“We are saddened that in spite the severity of this issue, there has been a veil of secrecy when it comes to dealings regarding the privatisation. We are against privatisations because we are sure that it will have minimal impact on the island’s dire financial situation,” their statement said.

“We have a moral obligation to defend our country’s economy and the national resources of our semi-occupied state for future generations,” they said.

Unions said that their intention was not to inconvenience people, so essential personnel will be excluded from the strike.

Renminbi overtakes euro as 2nd currency in global trade finance

Bloomberg has the story from China that the renminbi has overtaken the euro as the second largest currency in global trade finance. The story is based on data from Swift, according to which the renminbi had a share of 8.66% of letters of credit and collections in October, compared with 6.64% for the euro. Please note, this is a very specific sub-category of the currencies’ overall use in international transactions. The renminbi’s rank in all transaction in the global payments system is number 12. Interestingly, Germany is quoted as among the five countries making most use of the renminbi in trade finance. In January 2012, the renminbi’s share was less than 2%, against almost 8% for the euro. The share of the US dollar remains dominant at 81%, according to Swift.

December 04, 2013

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Euro crisis effects on the Balkans

The euro-crisis is hard felt also in the Western Balkans, points out this Deutsche Wellearticle. Before the euro crisis, Greek banks were important financial players there with more than 1900 branches, some 23,000 employees and financial commitments of €70bn or a 15% share of the overall basic capital of all banks in the Balkans. Together with Austrian and Italian financial institutes, they provided loans to local businesses. Five years into the Greek crisis the tide has turned and Greek banks pulled the money out of neighbouring countries. As foreign funds and investment expatriated, its heavy dependence on the EU turned falling exports into a recession, while persistently high structural deficits exasperated the effects of the crisis. There is not much support from the EU, busy with its own crisis amid a limited capacity to improve the situation.

December 03, 2013

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A look at how the Italian credit crunch affects business

The Wall Street Journal has descended deep into the Italian provinces to see how the credit crunch is affecting the economy, and found a marble company that has filed for bankruptcy despite good profitability and revenues. The reason is a cut in the credit line by its bank, Banca Marche, one of the country’s innumerable small and mid-tier banks, which account for about half of all lending in Italy. The article gives a good flair of the vicious circle of a credit crunch. Banca Marche was once one the region’s largest lenders, accounting for some 20% of all loans, but after the real-estate crunch, some property investors struggled to repay the loans, which in turn triggered a generalised loan retrenchment by the bank, and this in turn led to further bankruptcies. A similar effect, on a much bigger scale, has been observed with Banca Monte dei Paschi di Siena.

Russian Banks Most Exposed As Ukraine's "Precarious" Finances Spike Risk To 3 Year High

Ongoing anti-regime demonstrations in Ukraine are weighing on investor's risk perceptions asCDS spike to near three-year highs today (up over 100bps). At a minimum developments lower president Yanukovich's chances of remaining in power beyond the spring 2015 elections and possibly undermine his hold on power earlier, further decreasing the likelihood of sizeable financial support from Russia. With Moody's earlier comments on the nation's "precarious external liquidity" position; as Goldman warns, with even higher political uncertainty ahead, an acceleration of capital outflows might also follow and while they think the authorities will eventually turn to the IMF to avoid a disorderly sell-off of the currency, recent events arguably raise the risks to that view. However, the capital outflows are already having an impact as Reuters notes, Russian banks are considerably exposed as Ukrainian banks should deposit runs escalate.

Some background from Guy Haselmann of Scotiabank:

Ukraine is a strategically important country of 45 million people. A trade pact with the EU was close. However, it appears that a rival bid (or other means of influence) arose during two closed door meetings with Vladimir Putin. The press often reports that President Yanukovich’s corrupt government has shown an instinct for self-preservation often at the expense of the expense of the nation.

The Ukraine economy is in recession. The country has only $20 billion of foreign reserves which is 2 ½ months of imports (worse than Egypt). The IMF’s red flag level is 3 months. Ukraine has $10bln of external debt maturing in 2014. Its CDS rose over 100 bps this week to near 1100. Debt-to-GDP is only 43%, but Argentina defaulted with its debt-to-GDP at 50%. Its currency (Hryvnia), which was devalued in 2008, is pegged to the dollar. The current account deficit is 7% and herein lies the biggest problem.

The IMF is unlikely to help until after the 2015 election. The EU is unlikely to provide any aid. Russia may be enticed to help via loans. The President is on his way to China - who may help - but he may return no longer in power.

And Goldman notes the situation is fluid but highly likely that anti-regime protests will persist with several possible scenarios developing:

1) President Yanukovich declares a state of emergency and/or uses force to prevent protests from developing further;

2) President Yanukovich agrees to talks with the opposition and to a roadmap for signing the EU association agreement at some point in 2014 (our understanding had been that this would not be possible on the EU side, but EU leaders have recently suggested otherwise);

3) President Yanukovich does nothing and protests persist.

From the macroeconomic standpoint, these protests come at a time when the National Bank of Ukraine (NBU) has had to defend the currency peg through sizeable interventions, which have depleted the reserve cover to 2.5 months of imports, and when the government is arguably unable to roll its debt in the market. Goldman fears the further risk is that, due to the heightened political uncertainty, capital outflows could intensify, putting further pressure on the peg.

While there had been some press reports suggesting sizeable Russian financial help in exchange for the country not signing the EU association agreement, the recent developments, in our view, call this further into question. We think that Russia is unlikely to extend substantial help without guarantees. Given that it appears that President Yanukovich's chances of holding on to power beyond the 2015 spring election have decreased following the protests and schisms in his administration might even weaken his powers earlier (splits in the Region's Party, for instance, might deprive him of a majority in parliament) he might very well not be in a position any more to give those guarantees.

As indicated by polling and by the participation in street protests, the decision to suspend preparations for signing the EU association agreement was an unpopular one, at least with a significant part of the population. Goldman believes that President Yanukovich may have underestimated the political ramifications of doing so.

At this stage, it is difficult to forecast how the situation will evolve. Apart from the size of the protests it also matters to what extent the president can hold on to his own power bases in the Regions Party and the eastern part of the country. Given that the economy is in recession and the heavy industries in the east in particular are suffering, his support there might very well be more brittle than in the past.

But perhaps there is a silver lining - in an odd twisted way - the concerns about Ukrainian banks and the currency peg have seen deposit outflows increasing the risk to the country's financial system and creating a particularly acute headache for Russian banks. The silver lining, of course, is that Russia may be forced to provide more assistance in a Cyprus-style save for its own banks (lenders) and depositors...

While other foreign lenders have cut their Ukraine exposure in the five years since - to 20 percent of Ukraine banking sector assets in 2012 from 40 percent in 2008, according to a Raiffeisen Research survey - Russian banks have maintained a strong market presence, still accounting for 12 percent.

Among foreign banks, theRussians have easily the biggest exposure, more than twice that of Austrian lenders, the next biggest.

...

"[Moodys] estimate that these banks' exposure to Ukrainian risk is $20-$30 billion, a sizeable amount indeed, considering that their combined Tier 1 capital was $105 billion in June," Moody's said.

...

Moody's, which estimated that 35 percent of all bank loans in Ukraine were problem loans, said the country's severe economic problems would keep local borrowers under pressure and could result in higher loan losses for the Russian lenders.

In the absence of the association agreement with the European Union, Russian-Ukrainian trade is likely to rise, and the four big Russian banks may well increase their exposure to Ukraine, it added.

...

Dimitry Sologoub, head of research at Raiffeisen in Kiev, said the banks had learned lessons from the 2008 crisis, so were much less exposed to credit risk, liquidity risk and forex risk, and the central bank was calming matters by providing liquidity and foreign exchange.

"The question is how long it will go?The reserve cushion of the national bank is not so big."

In the meantime, Ukraine might secure short-term benefits from its closer ties with Russia, enough perhaps to stave off the kind of currency crisis that nearby Belarus suffered in 2011, said Charles Robertson, chief global economist at Renaissance Capital in London.

"In the long run, it will probably keep Ukraine poor. This is bad for Ukrainians and bad for Russia," he added.

"Instead of being a strong, successful economy on Russia's borders, able to buy plenty of Russian exports, Ukraine risks becoming another Belarus."